GameStop Corp. — Form 10-Q Summary
Business context and reporting period. GameStop operates a multichannel video game retail business, including stores, e-commerce, digital products and related businesses. This unaudited filing covers the 13 weeks ended May 4, 2013 (fiscal 2013 first quarter), compared primarily with the 13 weeks ended April 28, 2012. The company reported 6,544 stores at quarter-end. Management cautions that the business is seasonal and this quarter is not indicative of full-year results.
Financial performance and liquidity
| Metric | 13 weeks ended May 4, 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,865.3 million | $2,002.2 million | Down 6.8% |
| Gross profit / margin | $578.3 million / 31.0% | $599.9 million / 30.0% | Profit down 3.6%; margin up 1.0 percentage point |
| Operating earnings / margin | $87.2 million / 4.7% | $115.0 million / 5.7% | Down 24.2% |
| Net income attributable to GameStop | $54.6 million | $72.5 million | Down 24.6% |
| Diluted EPS | $0.46 | $0.54 | Down $0.08 |
| Cash from operations | $(331.4) million | $(162.2) million | Cash use increased $169.2 million |
- SG&A was $449.2 million, up 2.0%; as a share of sales, it rose to 24.1% from 22.0%, largely reflecting fixed-cost deleveraging on lower comparable sales. Depreciation and amortization was $41.9 million.
- Cash and equivalents were $245.7 million at May 4, 2013, compared with $329.1 million a year earlier and $635.8 million at February 2, 2013. Current assets were $1,562.4 million and current liabilities $1,235.7 million.
- Cash used in investing was $23.5 million, principally for systems, digital initiatives, store openings and remodels. Cash used in financing was $31.8 million, including $33.0 million of dividends paid and $25.5 million of share repurchases, partly offset by $25.7 million from stock-option exercises.
- The $400 million asset-based revolving facility had no borrowings outstanding; reported availability was $340.2 million, with $9.0 million of letters of credit. The filing does not present a separate total-debt figure in the supplied text. A separate discretionary $20 million foreign line had no overdrafts and $4.8 million of bank guarantees outstanding.
- Cash use from operations was driven mainly by working-capital outflows, including accounts payable and accrued liabilities and income-tax payments. Management notes that first-quarter cash use is seasonal as the company pays down year-end trade payables.
Material changes and drivers
- Comparable-store sales declined 6.7%. New hardware sales fell 30.6%, pre-owned sales fell 7.5%, and new software sales fell 3.8%; other product sales increased 14.6%, supported by mobile and digital products.
- Gross margin improved despite lower sales, mainly due to product mix, including lower hardware share and higher other-product sales. Pre-owned product margin declined to 47.3% from 49.1%, attributed to increased promotions.
- U.S. sales declined 7.3% and operating earnings fell to $92.8 million from $115.2 million. Europe sales fell 8.4%, and its operating loss widened to $9.6 million from $1.2 million. Australia sales rose 7.1% and returned to operating profit of $1.5 million; Canada sales fell 9.8%, while operating earnings were unchanged at $2.5 million.
- Foreign-currency translation reduced comprehensive income by $18.1 million. Currency derivatives generated a $9.4 million gain, substantially offset by $8.8 million of remeasurement losses on related balances.
Outlook, risks and notable items
- Management expected Sony and Microsoft next-generation consoles to launch by the 2013 holiday period, while warning that launch timing, features, and effects on existing-product demand and the pre-owned business could adversely affect sales and earnings. Management also expected the launches to pressure gross margin percentage in fiscal 2013’s fourth quarter.
- Management projected approximately $135 million in fiscal 2013 capital expenditures and expected to open approximately 125 stores, including 44 stores acquired in France during the first quarter. It stated that cash, operating cash flow and revolver availability should fund planned operations, investments and declared dividends for at least 12 months.
- The November 2012 share-repurchase authorization was $500 million. The company repurchased approximately 1.0 million shares for an average $25.07 during the quarter. After May 4, it purchased an additional 1.4 million shares at an average $34.73 through June 4. The board approved a $0.275-per-share dividend payable June 19; future dividends remain subject to board approval.
- Other disclosed risks include declining demand in the mature console cycle, digital and alternative distribution, competition, supplier dependence, international economic and currency exposure, and litigation. Management said ordinary-course legal proceedings, including wage-and-hour and consumer class actions, were not expected to have a material adverse effect.
- Management reported effective disclosure controls at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and comparable-store trends improved or deteriorated as the next-generation console launches approached, particularly in hardware and pre-owned products.
- Whether digital, mobile and other-product growth can offset declines in core game categories and support gross margins.
- How operating cash flow and working capital evolve through the year, given the substantial quarterly cash outflow and seasonal payables cycle.
- Whether Europe’s higher operating loss and the company’s international performance improve, including the effect of currency movements.
- Whether planned capital spending, store openings, buybacks and dividends remain consistent with liquidity, revolver availability and covenant conditions.